The early‑redemption of LHV’s 2020 Tier 2 subordinated bond will trim a portion of the bank’s regulatory capital that is classified as “Tier 2” capital. While the removal of that liability reduces the bank’s overall debt‑service burden and frees up cash that would otherwise be earmarked for future coupons, it also marginally lowers LHV’s capital‑ratio buffers (CET1 + Tier 2). Rating agencies normally assess whether the bank has enough supplemental capital (e.g., retained earnings, new equity or other Tier 1/2 instruments) to offset the loss; if LHV’s internal capital is sufficient, the redemption will be viewed as a prudent balance‑sheet optimisation and should leave its credit profile essentially unchanged or even marginally improved, as the market perceives a proactive approach to maturing liabilities.
From a funding‑cost perspective, the early call locks in today’s redemption price and eliminates a stream of 2‑3 % 10‑year coupon payments that would have continued until 2030. This reduces LHV’s future funding expense on the Tier 2 tranche, which can tighten its weighted‑average cost of capital, especially if the bank can replace the redeemed debt with cheaper equity or longer‑term senior debt at tighter spreads. In practice, we can expect a modest compression in LHV’s senior‑debt spreads and a slight upside pressure on its senior notes, while the called bond will trade at the redemption price (i.e., a “call‑price” discount).
Trading implication: Close out any remaining exposure to the 2020 Tier 2 bond – it will be redeemed at the announced cash‑settlement date – and consider a short‑term “buy‑the‑dip” on LHV’s senior unsecured paper or senior‑secured bonds, as the improved funding profile and unchanged credit rating may push those yields lower in the next 4–6 weeks. Keep an eye on any subsequent capital‑raising moves (e.g., secondary‑tier‑1 issuance) that could offset the Tier 2 buffer loss and again test the spread dynamics.